SunCity to expand investments

Since Sunway Real Estate Investment Trust’s (SunREIT’s) debut on July 8, which netted RM500 million in proceeds for Sunway City Bhd (SunCity), investors may be wondering what the property developer plans to do with the hefty amount of cash.


In an interview with The Edge Financial Daily last Thursday, SunCity property investment managing director Ngeow Voon Yean said it planned to focus on developing investment properties that could be injected into the REIT in the long term.

He said over the short term, some existing properties could be upgraded and cross-market synergies would be created with assets already in the REIT.

“As far as property investment, you can see the recent exercise where we have successfully IPO-ed all the assets into the REIT. It is one of the property investment division’s initiatives to unlock value for some of our assets that we have actually developed and managed,” said Ngeow, who is also a director of SunREIT’s manager Sunway REIT Management Sdn Bhd.

“One aspect of it is, of course, we use some of the proceeds to do land banking or joint ventures in the property development side and some of them will be committed to continue to expand the investment portfolios,” he added.

Ngeow said the RM500 million proceeds from the SunREIT listing had improved the company’s gearing, allowing it to gear up further to take advantage of expansion opportunities.
As at June 30, 2010, SunCity’s shareholders’ funds stood at RM2.45 billion. Cash and cash equivalents amounted to RM468.8 million while total borrowings were RM1.62 billion. Inclusive of the RM500 million proceeds, net gearing now stands at 0.46 times.
Under the listing exercise, Sun­City injected eight properties valued at RM3.4 billion into the REIT and retains a 38.3% stake (deemed interests) in SunREIT. Due to its major stake, SunCity will see a direct benefit from higher distributions by the REIT.

SunCity had been working on the development of the REIT model for the past 15 years based on the vision of its executive chairman Tan Sri Jeffrey Cheah, said Ngeow.

Currently, SunCity’s property investment division, together with property development, are the two largest contributing divisions of the company’s five business segments, with the others being hospitality, leisure and healthcare.

In the 18-month financial period ended Dec 31, 2009, property investment contributed RM204 million or 48% to core pre-tax profit, while property development accounted for RM149 million or 35%.

SunCity is one of the few developers in town with a sizeable investment department.

“We are still developers — you see our asset class of developments is actually very diverse. We build hotels, shopping malls and theme parks, hospitals, university premises,” Ngeow said. The property investment department had to manage the properties for a time before “the right opportunity” to unlock the asset value, he added.

SunCity is currently developing a 25-storey commercial office block, The Pinnacle, in Bandar Sunway. It is scheduled for completion in 2013 at a gross development value (GDV) of RM300 million.

“The first one we have started is The Pinnacle — an office tower. Menara Sunway (the existing office tower in Bandar Sunway) was completed about 15 years ago and since then we have not had any more commercial development within this integrated township.

“It is very timely now that we have got all the hotels, shopping malls, universities. Every mixed-use development has to have an office block so that we can have the critical mass, for instance, to have the ‘lunch hour crowd’,” Ngeow said.

Apart from The Pinnacle, other projects which could be injected into SunREIT are Lost World Hotel in Tambun, Ipoh (GDV of RM30 million,  in two blocks to be completed by January and August 2011), and Sunway Velocity shopping mall in Cheras (GDV of RM500 million, completion 2015).

This could take some time, however, since even after completion these developments would need to be managed by the property investment division for some years before being considered for injection into SunREIT.

Among the existing pool of investment properties held by SunCity are Monash University campus held at book value (BV) of RM171.2 million, Sunway University College with RM135 million BV, Sunway Hotel in Penang at RM24.2 million BV and 75%-owned Sunway Medical Centre with RM103.5 million BV.

SunCity recently announced that it would be acquiring an additional 45% stake in Sunway Lagoon Sdn Bhd (SLSB), which owns the Sunway Lagoon theme park, on top of its 51% controlling shareholding. This has been well received by analysts.

ECM Libra, which has a “buy” call on the counter with a target price of RM5.70 in a Sept 3 report, said the funding for the RM128.6 million cash for the 45% stake would not be a problem given the proceeds from the REIT listing.

The research house said the acquisition would be immediately earnings accretive without any additional management effort since Sunway Lagoon was already a subsidiary of Sunway City.

“Based on FY09 net profit of RM53.3 million (or RM35.5 million on an annualised basis), the additional 45% stake will contribute about RM15 million per annum to SunCity profit after tax and minority interest or 3.2 sen EPS.

“Assuming the transaction is completed by end-September, the said acquisition will add 2% to our FY10 estimates while FY11 and FY12 will see 6% to 7% earnings accretion,” it said. SunCity’s financial year-end is Dec 31 effective from financial period 2009.

SunCity closed last Thursday at RM3.79, up 11 sen or 2.99%.


Written by Kay
The Edge Malaysia